The dollar remains

The dollar remains. Recently, it has become fashionable to predict that the dollar would fall from the pedestal of the international reserve currency. Everyone is engaged in this - from bloggers to the former chairman of the Federal Reserve System (Fed) Alan Grinspin. Research shows: the client is more likely alive than dead

Mikhail Golosov
Professor of Economics, Massachusetts Technological Institute (USA)

Oleg Tsevinsky
Professor of Economics, Harvard University (USA)

Indeed, in an interview, ¹ Alan Grinspen said: “It is possible that the euro will replace the dollar as a reserve currency or play the same important role as the dollar.”

However, Greenpen may be mistaken: it is unlikely that the dollar will leave the world pedestal in the near future. It is unlikely that this will happen and in medium even the long -term perspective. There are three reasons:
The European economy, apparently, will develop worse than the American;
The Central Bank of the United States has a better reputation in the world;
Changing the status quo takes considerable time.

What is a reserve currency?

This is the money that is used, firstly, by state and international organizations to create their reserves and, secondly, as a convenient means of exchange in international trade as a measure of value. In recent economic history, several currencies played a similar role. The British pound served as a reserve currency in the XVIII and XIX centuries until it changed the US dollar in the middle of the 20th century. To date, the only rival of the dollar is the euro. According to the statistics of the International Monetary Fund, the share of the dollar in international currency reserves since 1999 has decreased from 70 to 65%, while the share of the euro increased from 18 to 25%. And the fall of the dollar relative to the euro and other currencies continues.

EU vs USA

However, this is what the statistics say. European and American GDPs are approximately comparable and make up about $ 14 trillion. The growth rate of the European economy was historically lower than the American one, it amounted to 3.0% in the EU against 3.3% in the United States in 2006, and over the last decade, the growth of the American economy exceeded the growth of European on average by 1% annually. The scale of innovative and research activity is significantly lower in Europe than in the United States: for example, the share of expenses for research and development in GDP is 2.6% in the United States and 1.8% in the EU. The European economy is much less dynamic and flexible and more regulated than the US economy. Hence the skepticism of economists. In particular, Alberto Alesion (Harvard University, USA) and Francesco Javazzi (Bokkoni University, Italy) predict ² that economic growth in Europe without a comprehensive economic reform may be too slow, and as a result of the EU, both economic and political - will noticeably decrease. At the same time, it is unlikely that the economic climate in the United States will significantly deteriorate, and the economy will develop more slowly than the European one.

Deficiency brings profit

Recently, the US trade deficit has been considered by many as a sign of serious economic problems. However, economists from the Harvard School of Public Administration. Kennedy Ricardo Hausmann and Federico Sturzenneger argue that the US current deficit reflects the United States to borrow dollars at low interest rates from foreigners, while investing abroad in more risky assets with high profitability. Emmanuel Farha, Ricardo Kaballero and Pierre-Olyvier Gurinsh in the American Economic Review magazine offer a theory according to which the US current deficit is a natural result of the reliability of American liquid assets that attract many foreign investors from countries such as China that are unable to offer equally high-quality long-term financial instruments.

Trust is beneficial

The second condition that determines the possibility of currency to be backup is trust in the monetary authorities that control it. One of the most important lessons that macro economists have taught politicians over the past thirty years is that populism is too expensive and an obstacle in his way - in particular, the independence of central banks from governments. ³ , one of our colleagues in the office hung a photograph of a tattoo on the trader’s hand with Wall Street with the Greenspin profile and the inscription “We believe in Greenspen” (the well-known expression in God We Trust has been punished). Ben Bernanke is still far from the God -like status of the former chairman of the Fed, but, of course, the deep trust of the economy to the federal reserve system is still stable. The European Central Bank is a young institution, and it copes with its duties quite decently. However, there are reasons for concern. The tendency of European states to intervene in the activities (or even limit independence) of their Central Bank is one of them. For example, French President Nicolas Sarkozy recently publicly criticized the ECB policy during the liquidity crisis, accused him of refusing to reduce interest rates and strengthening the euro. The Economist magazine rightly remarked that such public statements can easily undermine the trust in the ECB: “Imagine public indignation if George Bush allowed yourself a similar statement to the federal reserve system or Bernannock.” Public confidence in the monetary authorities arises very slowly, but can be very quickly destroyed. And if Europe wants the euro to become a reserve currency, to strengthen trust is the first thing to do.

Habit - the second nature

Another important reason why the dollar will remain a reserve currency is a habit. The dollar is the main currency in international trade relations. According to recent research by Gita Gopinat from Harvard and Roberto Rigobon from the Massachusetts Institute of Technology, the prices of 90% of American imports and 97% of American exports are assigned by manufacturers in US dollars. Given the weight of the United States in the gross issue and trade flows, a similar ratio is not surprising. From the point of view of an individual exporter or importer, it will always be profitable to set prices in dollars if all competing companies do the same. Only a joint coordinated switching of most players in international markets from a dollar to another currency can create sufficient incentives for a particular company to act in a similar way. Such coordination of actions of a large number of independent players, as a rule, takes a considerable time and may never happen at all.

And finally, it should be noted that excessive attention is paid to the fate of the dollar as a reserve currency. Whether this or that currency is reserve, in fact, it does not matter much for a given country or the rest of the world. Yes, if the reserve currency is yours, this gives some economic advantages, for example, the ability to collect an inflation tax. However, the size of these advantages is insignificant. The reserve currency is rather a matter of national pride, not the economy, and its future is intriguing, but by no means as a lively topic as it seems sometimes.

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1 German weekly STERN, September 2007.
2 in the recently released European bestseller "Future of Europe."
3 Ed Prekott and Finn Kidland received a Nobel Prize in Economics in 2004 precisely for the evidence of this idea.